Dispelling the ‘Bin Laden’ Options Trades By Steven Smith and Aaron L. Task

Dandelion Salad

By Steven Smith and Aaron L. Task
Global Research, August 31, 2007

Staff Reporters
thestreet.com
8/30/2007 3:23 PM EDT
http://www.thestreet.com/

Updated from 7:07 a.m. As if the mortgage-market meltdown wasn’t enough to spook investors, some market players expressed concerns about unusual options bets that some observers have dubbed “Bin Laden Trades.” The blogosphere and options trading desks have been rife with speculation about these trades, which are unusually large bets that the market will make a huge move in the next month.

Some entity, or entities, has taken a large position on extremely deep in the money S&P 500 options, both puts and calls, that won’t pay off unless the market undergoes an extremely large price move between now and the options’ expiration on Sept. 21. However, Dan Perper, a Partner at Peak 6, one of the largest option market makers and proprietary trading firms, has confirmed that the trades are part of a “box-spread trade.” “This was done as a package in which the box spread was used [as a] means of alternative financing at more attractive interest rates” explained Perper.

Simply put, two parties agree to trade the box at a price that essentially splits the difference between current rates. For example, the rough numbers would be that given the September 700/1700 box must settle at a value of 1,000 — it is currently trading around 997 — that translates into a 5% interest rate. For the seller it is a way to borrow money at a slight discount to the prevailing rate, and for the buyer, it is a way to lend money at a low rate of return, but it’s better than nothing at a time when others are scared and have painted themselves into a box (ha ha) because they have run out available funds. Currently there are about 63,000 700/1700 boxes open.

Perper expects that once the September options expire, you will see similar boxes established in the December series. As to why the September 700 put has over 116,000 contracts open, Perper thinks a good portion of that was created from the prior rollover when April options expired. The positions in question had option industry experts perplexed to come up with a rational explanation, which are far from the best or most efficient way to profit from what would be outlier events.

Those concerned about the worst-case scenario recalled that large put contracts were placed on airline stocks, notably American, a unit of AMR and United Airlines, in the weeks leading up to the Sept. 11, 2001 terror attacks. The first area of focus was that open interest September 700 S&P puts had such an unusually high number for such a low-probability trade. A put is a defensive bet that gives the holder the right to sell a security at a specified price, in this case more than 50% below the S&P 500‘s current level of 1463 as of Wednesday’s close.

For comparison’s sake, according to the Option Clearing Corp., the open interest in the July 700 strike some three weeks prior to expiration on July 20 was 790 calls and 7,300 puts, and the August 700 strike showed 1,250 calls and 14,800 puts prior to Aug. 17 expiration. And the volume completely outstrips anything seen last September, when the S&P was around 1300, some 20% below current levels. In September 2006, the 700 strike had 600 calls and 7,500 puts, and no strike below 1000 had open interest surpassing 42,000 contracts, and that was the 900 puts. The bulk of the September SPX trades in question have been put on since June 1.

Similar bets have also been placed on the DJ Eurostoxx 50 index, which won’t pay off unless the index tumbles nearly 25% to 2800, or below, by expiration on the third Friday of September. The trades were noted in various online forums, where the worst case scenario is often the first conclusion: “Only an act of terrorism akin to 9-11 — within the next four weeks — could make these options valuable,” writes one poster in the TickerForum chat room.

Others, such as the “Just Wondrin What Happened” blog, speculated that “China, reeling over losing $10 billion in bad loans to the sub-prime mortgage collapse presently taking place, is going to dump U.S. currency and tank all of Capitalism with a Communist financial revolution.”

Furthermore, the TickerForum posters focused on the 65,000 contracts open on SPX 700 calls, ostensibly bullish bets that give the holder the right to buy the index at that level. Given the fact that these calls are some 700 points in-the-money, and therefore have a delta of 1.0 — meaning the options price moves dollar-for-dollar with the underlying index — “the only advantage to owning them is it would be a more efficient and slightly less capital-intensive way to gain one-to-one exposure” to the S&P 500, Randy Frederick, director of derivatives at Charles Schwab, writes in an email exchange. Frederick noted the Spyder Trust (SPY) and other index and exchange-traded products provide a much more liquid, efficient and higher-leveraged way to establish a bearish position quickly.

Plus, it’s a lot easier to “hide” a big trade in the Spyders than the SPX options, which are only traded on the Chicago Board of Option Exchange and will be seen and facilitated by a tight-knit group of market makers. Because there are about half the number of open contracts on S&P 700 calls vs. puts, it was also posited that these trades are part of a large strangle. There is also open interest of 61,741 on the September 1700 puts. “Since this is only 11 contracts different from the 700 calls, it is possible that these two positions are making up a very large strangle, which could be either a breakout or neutral strategy depending upon whether or not it is a short strangle or a long strangle,” writes Frederick. “If this is a short position, it may be anticipating the market will drop if the Fed does not cut rates as many expect” at its Sept. 18 policy meeting. But such a strangle trade, with each leg being so deep in the money, would require a nearly 50% price move, up or down, to turn a profit. Frederick said the position leaves him more confused than scared, although he wouldn’t dismiss the frightening conclusion bloggers have come to. “It is also interesting that the anniversary of 9/11 occurs between now and the expiration of these options,” he writes.

“Perhaps there is speculation that another attack is in the works.” Brian Overby, director of education at TradeKing, a discount broker that caters to sophisticated option traders, suggested that this could be a box trade before Perper came forth. Overby noted that the September 1700 strike has open interest of 73,745 calls and 61,741 put options. “This could be someone trying to create a box spread, which is a position composed of a long call and short put at one strike, and a short call and long put at a different strike. The position is largely immune to changes in the price of the underlying stock, and in most cases, is a simple interest rate trade.” So the upshot is there is an explanation for this very unusual configuration of open interest in the S&P 500 Index’s September options, but it also shows jitters remain in this market.

Steven Smith writes regularly for TheStreet.com. In keeping with TSC’s editorial policy, he doesn’t own or short individual stocks. He also doesn’t invest in hedge funds or other private investment partnerships. He was a seatholding member of the Chicago Board of Trade (CBOT) and the Chicago Board Options Exchange (CBOE) from May 1989 to August 1995. During that six-year period, he traded multiple markets for his own personal account and acted as an executing broker for third-party accounts. He appreciates your feedback; click here to send him an email.To read more of Steve Smith’s options ideas take a free trial to TheStreet.com Options Alerts.


To become a Member of Global Research

The CRG grants permission to cross-post original Global Research articles on community internet sites as long as the text & title are not modified. The source and the author’s copyright must be displayed. For publication of Global Research articles in print or other forms including commercial internet sites, contact: crgeditor@yahoo.com

www.globalresearch.ca contains copyrighted material the use of which has not always been specifically authorized by the copyright owner. We are making such material available to our readers under the provisions of “fair use” in an effort to advance a better understanding of political, economic and social issues. The material on this site is distributed without profit to those who have expressed a prior interest in receiving it for research and educational purposes. If you wish to use copyrighted material for purposes other than “fair use” you must request permission from the copyright owner.

For media inquiries: crgeditor@yahoo.com
© Copyright , thestreet.com, 2007
The url address of this article is:
www.globalresearch.ca/index.php?context=va&aid=6660

Behind Bush’s Latest Anti-Iranian Threats by Muriel Mirak-Weissbach

Dandelion Salad

by Muriel Mirak-Weissbach
Global Research, August 31, 2007

President Bush’s most recent ranting, in which he accused Iran of threatening to unleash a “nuclear holocaust,” must be seen, for sure, in the context of the drumbeat for military aggression against the Islamic Republic.

Within the space of a few days, several articles appeared in the mainstream press, indicating that the Cheney project for launching a new war is on the front burner. Most explicit was the report of two British think tankers, Daniel Pletsch and Martin Butcher, issued on August 27 and leaked by Raw Story the following day. Their study, entitled, “Considering a war with Iran: A discussion paper on WMD in the Middle East,” claimed that the US could destroy Iran’s nuclear program, industrial base and government infrastructure within days.

But Bush’s specific reference to Iran’s alleged ambitions to develop a nuclear bomb, should be placed in the category of one who “doth protest too much.” What Bush did NOT mention is a development of major significance, which may well have been the trigger for his wild assertions. This was the agreement reached by the International Atomic Energy Agency and Iran, which proved that the persistent, rigorous approach pursued by the IAEA, to solve the conflict over Iran’s nuclear energy program through diplomatic means, has yielded results which the Agency itself has dubbed a breakthrough. The contention of the Bush-Cheney administration, which is bent on war at all costs, has been that the efforts of the European Union group of three (Great Britain, Germany and France) as well as those of the IAEA, have been destined to failure, since Tehran was only interested in gaining time to build its bomb.

Iranian President Mahmoud Ahmadinejad, speaking to journalists in Tehran on August 28, announced unequivocally that he believed, on the basis of the agreement with the IAEA, that the entire matter should be considered “closed.” This was not empty rhetoric of the sort often attributed to Ahmadinejad, but a statement of fact, as documented in the “Understandings of the Islamic Republic of Iran and the IAEA on the modalities of resolution of the outstanding issues,” published on August 29, by the new Iranian all news station News TV, among others. The text makes clear that the discussion process involving Iranian chief negotiator Ali Larijani and his IAEA interlocutors, including Director General Mohammad ElBaradei, has borne its desired fruits: to wit, that through the question-and-answer process, whereby the IAEA has raised its queries regarding specific aspects of Iran’s program and Iran has given its clarifications, has satisfied the agency’s demands. In sum, the document states that certain specific issues have been fully resolved, and that those yet to be resolved, will be dealt with in the same manner, such that specific timeframes can be defined for “closing the dossier,” as Ahmadinejad put it.

The text of the agreement was published on request of Iran, “as an INFCIRC document and to be made available to the public through the IAEA website.” It states: “Pursuant to the negotiations between H.E. Dr. Larijani, I. R. of Iran’s Secretary of Supreme National Security Council and H.E. Dr. ElBaradei, Director General of the IAEA, in Vienna; following the initiative and good will of the Islamic Republic of Iran and the agreement made, a high ranking delegation consisting of the directors of technical, legal and political departments of the IAEA, paid a visit to Tehran from 11 to 12 July 2007 during which ‘Understandings of The Islamic Republic of Iran and the IAEA on the Modalities of Resolution of the Outstanding Issues, Tehran 12 July 2007’ were prepared.”

The text reports on the following meetings that took place in Vienna and Tehran on July 24, and August 20-21, following which “both Parties reached the following understandings….” First, regarding the enirchment program, which has been targetted by the Bush-Cheney cabal as “proof” that Tehran wants the bomb. “The Agency and Iran agreed to cooperate in preparing the safeguards approach for the Natanz Fuel Enrichment Plant in accordance with Iran’s Comprehensive Safeguards Agreement. The draft text of the safeguards approach paper, and the facility attachment of IRN- were provided to Iran on 23 July 2007. The safeguards approach and the facility attachment were discussed during technical meetings in Iran between the Agency and the AEOI from 6 to 8 August 2007. Further discussions will be held with the aim of finalizing the facility attachment by the end of September 2007.”

As for the heavy water reactor in Arak, “Iran agreed with the Agency’s request to visit the heavy water research reactor (IR40) site in Arak. A successful visit took place on 30 July 2007.” Furthermore, it is reported that “On 12 July 2007, Iran accepted the designation of five additional inspectors” and “On 12 July 2007, Iran agreed to issue one year multiple entry visas for 14 inspectors and staff of the Agency.”

Under the rubric of “Past Outstanding Issues,” the question of plutonium experiments was dealt with. Here, the joint text reports that in the course of July and August, the IAEA presented questions, and Iran, answers, to various issues. Then, in a sentence which might have caused heart tremors for Dick Cheney, the text states: “On 20 August 2007 the Agency stated that earlier statements made by Iran <are consistent with the Agency’s findings>, and <thus this matter is resolved> (emphasis added). This will be communicated officially by the Agency to Iran through a letter.”

Regarding other vital issues, a clear timeline is set for the question-and-answer process to yield its results. regarding the issue of P1-P2, the IAEA says the Pu experiments should close by August 31, and that it will therefore provide all its remaining questions to Iran by that date. Discussions are scheduled then for September 24-25 in Tehran, followed by a mid-October meeting, both to clarify the questions. “The Agency’s target date for the closure of this issue is November 2007,” says the text.

And, for remaining issues, the same sensible approach is adopted: “once all the above mentioned issues are concluded and their files are closed,” further questions can be submitted by the IAEA, again with specific dates, and Iran will respond, within deadlines.

In a final paragraph entitled “General Understandings,” the document asserts five points which must have sent Bush ballistic. Since it is absurd to imagine that the establishment press will give the public any insight into what is going on here between the IAEA and Iran, it is worth quoting the points in full:

“1. These modalities cover all remaining issues and the Agency confirmed that there are no other remaining issues and ambiguities regarding Iran’s past nuclear program and activities.

2. The Agency agreed to provide Iran with all remaining questions according to the above work plan. This means that after receiving the questions, no other questions are left. Iran will provide the Agency with the required clarifications and information.

3. The Agency’s delegation is of the view that the agreement on the above issues shall further promote the efficiency of the implementation of safeguards in Iran and its ability to conclude the exclusive peaceful nature of the Iran’s nuclear activities.

4. The Agency has been able to verify the non-diversion of the declared nuclear materials at the enrichment facilities in Iran and has therefore concluded that it remains in peaceful use.

5. The Agency and Iran agreed that after the implementation of the above work plan and the agreed modalities for resolving the outstanding issues, the implementation of safeguards in Iran will be conducted in a routine manner.”

The gist of this document is that, contrary to the hysterical ravings from the White House, diplomacy does work, and that if Iran were treated as a normal country, with due respect, as Tehran has always insisted, then progress could be made on any front. The implications of the IAEA-Iran “understandings” are profound: we are not dealing here with a “rogue state” or a member of the “axis of evil,” but with a sovereign nation which correctly asserts its right to nuclear energy technology, in the framework of the IAEA and NPT.

The fact that the IAEA reached this groundbreaking agreement has thrown a major monkey-wrench into the Bush-Cheney cabal’s plans for war, based on their claims that Iran is building the bomb. But then, Washington will quickly retort, aren’t the Iranian Revolutionary Guards killing our troops in Iraq?

Global Research Articles by Muriel Mirak-Weissbach

 


To become a Member of Global Research

The CRG grants permission to cross-post original Global Research articles on community internet sites as long as the text & title are not modified. The source and the author’s copyright must be displayed. For publication of Global Research articles in print or other forms including commercial internet sites, contact: crgeditor@yahoo.com

www.globalresearch.ca contains copyrighted material the use of which has not always been specifically authorized by the copyright owner. We are making such material available to our readers under the provisions of “fair use” in an effort to advance a better understanding of political, economic and social issues. The material on this site is distributed without profit to those who have expressed a prior interest in receiving it for research and educational purposes. If you wish to use copyrighted material for purposes other than “fair use” you must request permission from the copyright owner.

For media inquiries: crgeditor@yahoo.com
© Copyright Muriel Mirak-Weissbach, Global Research, 2007
The url address of this article is:
www.globalresearch.ca/index.php?context=va&aid=6658